Sunglasses

1. Most sunglasses are made by the same company. Do you prefer the "quality" of Ray-Ban to Oakley? Do you think Bulgari is better than Dolce & Gabbana, or Salvatore Ferragamo is better than Prada? Wake up. They're all made by one company, Italian manufacturer Luxottica (NYSE: LUX - News) -- one of the biggest consumer companies that consumers have never heard of. Luxottica also makes sunglasses branded Burberry, Chanel, Polo Ralph Lauren, Paul Smith, Stella McCartney, Tiffany, Versace, Vogue, Persol, Miu Miu, Tory Burch and Donna Karan.

"We manufacture about 70% of those brands in our factories in Italy, and the balance in America and China," says Luxottica spokesman Luca Biondolillo. "We do the design, the manufacturing, and the marketing," he adds. The company makes most of those brands under license, working closely with designers at the relevant fashion houses. But it owns several brands itself, including Ray-Ban, Oakley, Oliver Peoples and REVO.

2. In many cases, the same company is also selling you the glasses. Luxottica also owns LensCrafters, Pearle Vision and Sunglass Hut. This is extreme vertical integration. The eye doctor telling you that you need a new pair of glasses, the sales people helping you choose them, and the people who design and make the glasses all work for the same company. Make of it what you will. But if your financial advisor was actually employed by the mutual fund company that he recommended for your portfolio, you'd at least want to know.

3.The markups are as big as they seem. Whenever I have bought a new pair of regular eyeglasses, I have always reflected on how little I seem to get for my money. I can sort of understand why lenses are so expensive, as the material has to be made and ground precisely. But $100 or $200 for frames? These are bits of metal or molded plastic. Once I bought tiny slivers of hollow titanium that weighed considerably less than the bills I was handing over.

The cost of a new pair of glasses will of course reflect materials and labor. But the price will also reflect brand values and marketing -- and how much consumers will pay. Luxottica says it makes a gross profit of 64 cents on each dollar of sales. Even after deducting sales and advertising costs, overhead, and brand licensing royalties, it's still making 52 cents. That's some margin.

While the company's return on equity has fallen since the global economy turned down, last year it still managed a respectable 11%, according to data from FactSet Research Systems. A few years ago that number was as high as 20%. And investors are confident on the company's future. The stock has jumped from $13 to $25 from last year's market lows. It's about 20 times likely earnings, an optimistic rating...... more